Opportunity Zones – Deferral of Gains Offers Flexibility for Investors
30 January 2019
We have discussed the creation of Qualified Opportunity Zones under the Tax Cuts and Jobs Act (TCJA), signed into law in December of 2017 before this. We continue to update you with reminders, additional insights and analyses because we believe that, for some taxpayers, Qualified Opportunity Zones and the associated Qualified Opportunity Funds can be an excellent vehicle to defer – and minimize – the realization of capital gains.
Most such gains (including passthrough gains) are eligible for deferral if they are invested in a Qualified Opportunity Fund within 180 days of the sale or exchange which gives rise to the gain.
Qualified Opportunity Funds can provide three potential tax benefits to investors:
• Capital gains arising from the sale of any asset can be deferred if the gains are rolled over into investment in a Qualified Opportunity Fund within 180 days of the date on which the gains would have been realized.
• These deferred gains receive a 10% step-up in basis if the investment in the Qualified Opportunity Fund is held for over 5 years, and a 15% step-up in basis if the investment is held for over 7 years.
• If an investment in a Qualified Opportunity Fund is held for over 10 years, any post-acquisition gain on this investment may be excluded from taxable income entirely.
Qualified Opportunity Funds must hold at least 90% of their assets in “qualified property,” which is defined as:
• Stock in any Qualified Opportunity Zone business,
• Partnership interest in a Qualified Opportunity Zone business, or
• Any business property which is tangible property and is used in a trade or business located within a Qualified Opportunity Zone.
• Debt instruments are not considered “qualified property.”
• With respect to investments in tangible property, investors are required to spend at least as much to improve the property as they have to purchase it. The amount required to be spent upon the improvement is calculated on the basis of the value of buildings and excludes the value of the land.
• There is a “working safe harbor” for Qualified Opportunity Fund investments, allowing a Qualified Opportunity Zone business to hold funds to be invested for up to 31 months and have these funds considered “qualified business property.” The business must have a written plan for use of these invested funds during the 31-month period.
Louisiana holds 149 Qualified Opportunity Zones. See here for more information.
If you have questions on how and whether investment in a Qualified Opportunity Fund would be beneficial to you, please click here to email me directly.